Friday, June 22, 2012

Fed Rules Make Credit Approval Harder to Come by for Stay-at-Home Spouses

Money can't buy you love, Storm Trooper. Sorry.
The Federal Reserve last year announced a new rule that requires credit card companies to evaluate personal income, rather than household income, in making credit card approval decisions. Not only did this move cause a stir among consumer interest groups, it also left many of the folks who aren’t primary household earners understandably unsure as to whether they would be able to obtain credit.

Credit scores are, simply put, a valuable commodity. Decision makers from banks to landlords to employers use these three-digit encapsulations of our fiscal responsibility to make decisions regarding suitability for loans (not to mention corresponding interest rates), jobs, and apartment rentals, just to name a few things. As a result, the difference between excellent credit and limited credit is an extremely expensive one that could create roadblocks for an individual who finds him or herself financially independent for the first time in years, as could be the case in the event of divorce or the passing of a loved one.

That is why the Fed’s new underwriting rules are so troubling to many stay-at-home spouses. Credit cards are generally considered the most attainable and efficient credit building tools, as they report information to the major credit bureaus on a monthly basis and do not require the same debt burden as a loan. However, in the aftermath of this new rule being put into effect, two things have become clear: 1) The Fed’s decision was logical and 2) It doesn’t completely shut out stay-at-home spouses from credit access.

In the years prior to the Great Recession, an imbalance existed in credit card underwriting criteria, and this imbalance in fact helped lead to the economic downturn. While credit card companies allowed consumers to list household income on their applications, they did not require information about household debt, allowing applicants to instead list the amounts they owed personally.

 The effect was to mask applicants’ disposable income and therefore their ability to handle additional monthly monetary obligations. Two applicants could appear identical to a credit card company in light of their household income and personal debt, but if one of those applicants’ spouses had debt that a portion of the household income was already earmarked for, they would in reality be drastically different credit candidates.

Without the ability to evaluate applicants as accurately as possible, credit card companies inevitably approved unqualified candidates as well as rejected qualified ones. This in turn led to disgruntled consumers and widespread overleveraging – spending more than one can afford to pay.

To solve this problem and foster balanced underwriting criteria, the Fed instituted the aforementioned rule requiring individual income to be listed on credit card applications, along with individual debt. And while this appears at first glance to have created a whole new set of problems given that stay-at-home spouses without independent income would seem to lack the disposable income necessary to handle the payments associated with a new line of credit, further inspection reveals that the problem is not as significant as one might think.

Stay-at-home spouses indeed have a couple of options at their disposal when it comes to obtaining credit. Many credit card companies make joint applications available, which allow couples to apply together for a shared credit card account that reports monthly to both parties’ credit reports, enabling them both to build credit. In addition, secured cards represent an attractive option for stay-at-home spouses who don’t have consistent income streams but do have a bit of money saved up. Pretty much anyone with the $200 needed to place a secured card’s refundable security deposit and the assets necessary to make $15 minimum payments can get a secured credit card, which are no different from normal credit cards in terms of credit building capabilities.

Stay-at-home spouses obviously will not have the same selection of credit card offers from which to choose, but they won’t be forced to start over if something happens to their marriage.

Odysseas Papadimitriou is a former Capital One senior director and is the founder and current CEO of Card Hub, a website that helps consumers compare credit cards and purchase discounted gift cards.

Picture by JD Hancock.

No comments: